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The larger "government shouldn't pick winners and losers" meme is idiotic in the context of alternative energy and green tech. It's basic economics that the market fails to pick efficient winners and losers in industries that involve large negative externalities.



Most economists do not accept that direct government subsidy to businesses leads to an economically efficient outcome, even in cases of negative externalities. Many economists would say that Pigovian taxes or creation of markets in the externality are likely to be more efficient. Bottom line: market failure does not mean that government solutions are automatically better. Government failure exists too!

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I think in the political discourse, pigovian taxes would be considered "government picking winners and losers" (specifically losers).

Also, the question isn't whether direct subsidies are more efficient than taxing externalities. The question is whether direct subsidies are more efficient than doing nothing (which is the only politically feasible alternative).

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1) I read a lot of economics blogs and I see many economists who are against "government picking winners and losers" in the form of subsidies; but favor, e.g. revenue-neutral carbon taxes. There are strong economic reasons why the two are not at all the same.

2) Direct government subsidies for favored corporations is likely less economically efficient than doing nothing in cases. Subsidy decisions are not guided at all by the info encoded in the price system, and are instead likely to be based on rent-seeking by favored interests groups. See <http://en.wikipedia.org/wiki/Economic_calculation_problem...;

Your original comment cited "basic economics" and implied that the government would be better than the market at "picking winners and losers" in the face of negative externalities. But that is not a consensus view among economists.

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> Direct government subsidies for favored corporations is likely less economically efficient than doing nothing in cases.

In cases, yes. Given the sheer magnitude of thee externalities in environmental situations, not likely. We're talking trillions of dollars of implicit subsidies here.

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I believe you are committing the "Yes Minister" fallacy:

"Politician's logic: We must do something. This is something. Therefore we must do it."

Direct government subsidies create deadweight loss, and by hurting the competitive position of companies and technologies that don't get the subsidy, they can actually make the negative externality worse. You can't justify a bad intervention just by pointing to the magnitude of the externality.

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How would "pigovian taxes would be considered "government picking winners and losers" (specifically losers)."

I mean, it would be, only in the sense that "criminal justice system picks losers, by arresting people who commit crimes".

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I disagree. If you don't like the external costs of a particular form of energy you can tax it directly. Taxing things you don't want is different than subsidizing particular companies offering particular alternatives (i.e. picking winners and losers) since it does not favor one solution over another. Government should act as referee, not venture capitalist.

One irony to Tesla is that while they do benefit from loan programs they would have been much better off if GM and Chrysler had been allowed to fail. As it is now Tesla has to compete with companies with strong government support.

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I said the market fails to pick the efficient winners and losers. I wasn't advocating for a particular form of addressing that problem.

Also, I'd arguing that taxing a particular form of energy is equivalent to picking a loser.

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Taxing something in proportion to its external costs isn't picking a loser, it's levelling the playing field. OTOH, subsidizing particular manufacturers of solar panels or electric cars puts all other alternatives at a disadvantage.

BTW, you've failed to substantiate your claim that the market fails to pick efficient winners and losers. How would you even define "efficient" without appealing to the marketplace?

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> Taxing something in proportion to its external costs isn't picking a loser, it's levelling the playing field

Clever rhetorical trick.

> BTW, you've failed to substantiate your claim that the market fails to pick efficient winners and losers. How would you even define "efficient" without appealing to the marketplace?

It's not a claim that requires substantiation, it's common knowledge: http://en.wikipedia.org/wiki/Market_failure#Externalities

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It's also common knowledge that govts don't actually handle exernalities all that well. In fact, they often make things worse.

And then there's the whole "regulatory capture" thing.

Govts fail all the time.

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I don't disagree with those things, but the meme "government shouldn't pick winners and losers" doesn't capture any of those points. In the debate, Romney said in the same spiel that the free market always works better.

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> Romney said in the same spiel that the free market always works better.

And he's right because the free market has far more diversity. To put it another way, govt is pretty much the definition of systemic risk.

The free market has folks doing lots of different things. Some think that electric cars are the way to go while others stick with gas. Still others go with compressed air.

Govts don't make diverse bets and they're a lot slower to change course when things don't work (because the folks benefiting from the current plan aren't paying its costs).

Yes, "all the wood behind one arrow" can be more efficient, but only when everything works out, which is not all that often.

"Let 1000 flowers bloom" works much better in the real world.

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Whether or not the government should pick winners and losers is separate and unrelated to the question of market efficiency. Why can't I simultaneously acknowledge that externalities produce less than efficient markets and that government subsidies produce deadweight loss?

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The terminology is reflective of the flawed proposition that the market will pick efficient winners. The government "picking winners and losers" is implicitly juxtaposed against a hypothetical "fair game."

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>It's basic economics that the market fails to pick efficient winners and losers in industries that involve large negative externalities.

Real life is not so simple, as negative externalities can also be generated by legal frameworks such as http://en.wikipedia.org/wiki/Limited_liability .

You need to examine the legal statutes governing each industry in question and develop measures of the ease at which claimants can receive compensation for damages to determine whether the observed externalities are intrinsic to the industrial process or whether the externalities are intrinsic to the legal process.

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Trust me, as a lawyer I'd love for the government to force companies to internalize externalities through litigation. But not only is it wholly impractical for physical and logistical reasons, it's also not the law and hasn't been since the industrial revolution.

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I'd be interested in the justifications for "wholly impractical". Businesses are already quite capable of purchasing liability insurance including for pollution, so I imagine the debate is over the benefits of centralized vs. decentralized forensic services.

Regardless of where we come out on the above issue, my primary argument is that by recognizing that the existence of liability statues affects the existence of negative externalities, we recognize that we cannot make the assertion that markets cause the existence of negative externalities without first accounting for the effects of liability statutes.

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First, realize that it's not limited liability by itself that insulates companies from the costs of their activity. Even without limited liability, it's just not really illegal to pollute. If your pollution increases my risk of lung cancer by 250%, that is something that has a cost. You can put a dollar value on that statistical probability. But you can't sue over it, because by and large outside of medical malpractice it's nearly impossible to sue for statistical injuries.

Second, individual private suits will never internalize even a fraction of the cost of an externality. When you're sitting in a lab with a computer simulation, you can look at the data and do a good estimate of how many cases of lung cancer can be attributed to the nearby coal plant, but it's nearly impossible to meet the necessary burden of proof with regard to one particular case. Say one factory causes 10% of all the lung cancer cases in one part of the city. The burden of proof in civil litigation is more likely than not. For any given case of lung cancer, it is not more likely than not that the factory was the cause. We don't allow suits based on statistically divisible causality.

Third, enough people won't sue. Partly because most people will have no idea what caused their injuries, but also because a disproportionate number of people injured by pollution are poor. They're ignorant of the legal system and don't have money for lawyers. Lawyers won't take such cases on contingency, because winning is nearly impossible.

Fourth, even when the suits are successful, defendants will pay a fraction of what they should, because they'll pay a team of $1,000/hour lawyers to make sure they do. BP is probably paying Kirkland & Ellis $1,000/minute, and its worth every penny because they're saving billions of dollars.

A smart man once pointed out: "When large numbers of people are involved, the argument for the institution of property rights is weakened and that for general regulations becomes stronger." Ronald Coase, "The Federal Communications Commission," 2 J. Law and Economics 1, 29 (discussing spectrum allocation, but using smoke pollution as an example). Coase is of course one of the luminaries of modern economics, and his theories are the bedrock of conservative political policies.

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"If your pollution increases my risk of lung cancer by 250%, that is something that has a cost. You can put a dollar value on that statistical probability. But you can't sue over it"

I disagree. For example: http://en.wikipedia.org/wiki/Tobacco_Master_Settlement_Agree..., http://en.wikipedia.org/wiki/Mesothelioma#Legal_issues

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> Even without limited liability, it's just not really illegal to pollute. If your pollution increases my risk of lung cancer by 250%, that is something that has a cost. You can put a dollar value on that statistical probability. But you can't sue over it, because by and large outside of medical malpractice it's nearly impossible to sue for statistical injuries.

Bodily harm is not the only form of harm for which one may be liable. Repeated dispersal of unwanted waste upon other's property could be considered property damage, even if the waste cannot or has not yet caused exposure related medical conditions upon their person.

In an alternate legal context, a society might decide that proving an ash residue repeatedly collected on your property matches ash repeatedly emitted by a factory is sufficient grounds for property damage litigation without requiring you to also prove bodily harm. However, this would raise costs on industry by requiring them to be located further from residential areas.

Different societies will arrive at different tradeoffs and balances on these issues through the use of non-market forces, which will influence the incidence of negative externalities as much as market forces.

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It's the sort of basic economics that is too nuanced for many people, it seems.

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